New York’s Approach to Apportioning Defense Costs Among Multiple Insurers

Insurers in New York have an “exceedingly broad” duty to defend their policyholders against any claim that is potentially covered by the policy. Regal Constr. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 930 N.E.2d 259, 261 (N.Y. 2010).

But New York courts have yet to definitively answer the question of how defense costs are to be apportioned among insurers in situations where multiple insurers share responsibility.

The issue was most recently addressed in Travelers Casualty and Surety Co. v. Alfa Laval, Inc., No. 650667/2009 (N.Y. Sup. Ct. Nov. 28, 2011), in which the court found a primary insurer jointly and severally liable for the entire cost of defense. The decision is logically consistent with an insurer’s duty to provide a complete defense but strays from New York precedent.

In the case, Alfa Laval was faced with numerous asbestos-related claims and sought coverage under policies issued by various insurers, including Travelers. Prior to Travelers seeking a declaratory judgment, Alfa had sought payments for the cost of defense from a number of its insurers and Travelers had unilaterally made payments for only a portion of the defense. The primary issue facing the court was how to apportion the cost of defense.

Travelers argued that the standard approach to apportioning defense costs in cases of multiple insurers was the “allocation” (pro rata) method.Alfa countered that the broad scope of an insurer’s duty to defend required Travelers to provide a complete defense, which necessarily implicated the “joint and several” approach.

The court was sympathetic to Alfa’s position but ultimately failed to address the integrity of Alfa’s argument. Instead, the court determined that both the joint and several approach and the pro rata method were viable options, and that it was within the court’s discretion as to which should be used.

The court dismissed Travelers’ assertion that Alfa’s act of seeking payments from multiple insurers precluded subsequent application of the joint and several approach and found Travelers jointly and severally liable for the entire cost of defense. The opinion represents the newest development in a line of inconsistent decisions.

As it currently stands, a handful of approaches have been applied but no one standard has been adopted as the exclusive approach.

The traditional approach, consistent with Travelers’ position, is that pro rata allocation is the proper standard. See Atl. Mut. Ins. Co. v. Atl. Nat’l Ins. Co., 326 N.Y.S.2d (N.Y. Sup. Ct. 1971); see also Fed. Ins. Co. v. Atl. Nat’l Ins. Co., 250 N.E.2d 193 (N.Y. 1969); see also Nat’l Grange Mut. Ins. Co. v. Cont’l Cas. Ins. Co., 650 F.Supp. 1404 (S.D.N.Y. 1986). This view was recently reaffirmed in Fulton Boiler Works, Inc. v. American Motorists Insurance Co., No. 5:06-CV-1117, 2010 U.S. Dist. LEXIS 28756 (N.D.N.Y. Mar. 25, 2010).

But other courts have found room for both the pro rata approach and the joint and several approach. Most notably, the court in Continental Casualty Co. v. Rapid-American Corp., 609 N.E.2d 506, 514 (N.Y. 1993), determined that “When more than one policy is triggered by a claim, pro rata sharing of defense costs may be ordered, but we perceive no error or unfairness in declining to order such sharing, with the understanding that the insurer may later obtain contribution from other applicable policies.” The Travelers court relied on the Rapid-American decision in concluding that either approach was acceptable, but more firmly appropriated the choice to the court.

In developing its discretionary standard, the court explained, “where policies are concurrent, the joint and several method is indicated…whereas pro rata allocation is indicated where the policies are successive and it cannot be readily ascertained during which coverage period (or periods) the insurers’ liability was triggered.”

However, the court diluted this distinction by adding that these were not the only factors to consider and that “ordinary principles of common sense and fairness” should also weigh in the determination.

The resulting opinion is a muted statement on the issue in which the court passed over the opportunity to take a clear stand and instead opted to approach the issue on a case-by-case basis. In doing so, the court neglected to address the tension that exists between the logical demands of providing a complete defense and the precedent of pro rata sharing, and left the issue of apportioning defense costs among multiple insurers unsettled.

Despite its analytical shortcomings, the Travelers decision offers some instruction.

First, it reasserts the view that both the joint and several approach and the pro rata method are viable options for apportioning defense costs.

Second, it signals that the joint and several approach will be favored in situations of concurrent policies, whereas the pro rata method will be favored in situations of successive policies and continuous harm.

Finally, it indicates that an insured’s act of seeking defense costs from other insurers will not relieve an insurer of its obligation to provide a complete defense.

Insurers must account for the eventuality that, despite the presence of other insurers, they could be obligated to bear the costs of a complete defense, with the right—and accompanying burden and risk—of seeking contribution from those other insurers.

The duty to defend, as confirmed by the decision in Travelers, is an “exceedingly broad” duty that in many cases could force an insurer to bear unanticipated costs. The decision leaves many questions unanswered but it serves as a valuable reminder that New York courts have yet to adopt a single approach to allocating defense costs among multiple insurers, and insurers may still be jointly and severally liable for the entire cost of defense.